China in Transition

Rural Land Circulation in China Gaining Momentum: The increasing role of trust companies

Chi Hung KWAN Consulting Fellow, RIETI

In China, land in rural areas is collectively owned, and farmers are granted with only the right to use the land. Under such a system, the room for the circulation of agricultural land is very limited, and this hampers agricultural modernization based on large-scale farming. It also hinders the use of agricultural land abandoned by farmers who are flocking to the cities. Encouraged by the government, various attempts have been made to resolve the problem by promoting the circulation of only contractual management rights of land—corresponding to the right to use—without changing ownership. The latest is the introduction of land circulation trust schemes, which has increasingly attracted attention.

China's land system and its problems

In China, a country advocating the cause of socialism, all land is publicly owned, and no private land ownership is allowed. The public land ownership system takes the form of state ownership in urban areas and collective ownership in rural areas. The "collective" in this context refers to a collective economic organization of farmers, such as an agricultural production cooperative, which owns the land on the farmers' behalf. Since the 1980s, as the country has pursued greater reform, the basic production system in rural areas has changed from "people's communes" to a "household contract system." Under the "household contract system," farmers are given the "right to use" the land to which they have been contracted to work, rather than outright "ownership." Usage rights on agricultural land (contractual management rights) last for 30 years. This is far shorter than the periods for residential land (70 years), industrial land (50 years), and commercial land (40 years) in urban areas (Fig. 1).

Figure 1: Land System in China
UrbanRural
OwnershipState ownedCollectively owned
Usage rights
(Years)
Residential (70 years)
Industrial (50 years)
Commercial (40 years)
Agricultural land (30 years)
Collective construction land
 Residential land
 Land for public welfare facilities
(Source) Prepared from various reference materials

Under a collective landownership system of this type, rights to the land expire when farmers lose their registration as farmers through such actions as migration to urban areas. In extreme cases, they receive no compensation whatsoever. On the other hand, there are many young workers from agricultural communities working far from home in urban areas. The agricultural land to which they once contracted to work is now left deserted because it cannot be sold.

Practicing large-scale farming by consolidating agricultural land is necessary for raising productivity in the agricultural sector. However, it has been hard to realize this because the circulation of agricultural land is heavily restricted.

Also, the conditions for compensation given when local governments expropriate land are far inferior in rural areas compared to urban areas. Moreover, the laws governing such compensation are vague. In fact, agricultural land expropriation by governments has become a huge social issue, as evidenced by outbreaks of riots by farmers across China.

Promoting the circulation of land as a solution

The ultimate way to solve these problems is to allow privatization of agricultural land. In other words, China will have to award rights over agricultural land, including rights of ownership, to farmers. However, some obstacles, including ideology, resistance from local governments that derive income from the land, and severe restrictions on the conversion of agricultural land to other uses that aim to maintain food self-sufficiency, are preventing this from happening. At the current stage, there is little possibility of privatizing agricultural land. Given that background, experiments have continued throughout China to make land use more efficient by consolidating agricultural land through land circulation, while adhering to the principle of collective ownership. In rural areas, such experiments cover not only agricultural land but also collective construction land (which includes residential land), but here the focus is on agricultural land.

In the early years of reform in China, circulation of agricultural land went only as far as negotiated transactions between individual farmers through exchanging, leasing, and outright transfer of land (or strictly speaking, contractual management rights or land-use rights). As market reforms proceeded, however, more sophisticated forms of land circulation including land joint-stock cooperatives and land circulation trusts that involve more farmers and larger areas of agricultural land have come to be adopted. The following summarizes each of these.

1) Exchange of land-use rights
This happens when a farmer trades the right to use the land to which he has contracted to work for the right to use the land of another farmer belonging to the same collective economic organization. This is intended to make it more convenient for both parties to cultivate the land.

2) Leasing of land-use rights
In a land-use rights lease, a farmer leases out all or part of the land to which he has contracted to work to another farmer, enterprise, etc. Lessees do not have to be from the same collective economic organization (if they are, they are referred to as subcontractors), but may also be from outside it.

3) Outright transfer of land-use rights
An outright transfer of land-use rights means that the farmer contracted to the land transfers the right to another farmer engaged in farm production and management on all or part of the land and belonging to the same collective economic organization. This is allowed only for households that have built up a stable livelihood, for example, by taking residence in an urban area.

4) Land joint-stock cooperatives
In a land joint-stock cooperative, farmers invest in the land contractual management rights by acquiring shares, which they do volitionally. The land is pooled among farmers, and their organization manages it jointly. Any profit remaining after deducting costs is distributed according to the size of each farmer's share. A typical example is the Nanhai Model, which is widely practiced in the Nanhai district of Foshan, Guangdong (see Box).

5) Land circulation trusts
This is a system designed to encourage efficient land use by farmers (i.e., entrusters). Land is entrusted to a trust company, which is responsible for procuring funds, constructing buildings, and leasing buildings to tenants. The net profit accrues to the entrusters (or other beneficiaries) as a trust dividend (Fig. 2). This closely resembles land trust arrangements widely used in other countries, including Japan. In China's case, however, the trust assets are not land ownership but land usage rights (contractual management rights). There also are cases where a land joint-stock cooperative or a village committee entrusts the land to a trust company on the farmers' behalf, and cases where an organization established by the local government plays the role of the trust company.

Figure 2: How a land circulation trust worksFigure 2: How a land circulation trust works
(Source) Prepared from various reference materials

According to Minister of Agriculture Han Changfu, agricultural land that had already been circulated reached 23.9% of all agricultural land as of June 2013 (State Council Information Office, "Press Conference on Increasing Food Production, Raising Farmer Income, and Thoroughly Practicing the Spirit of the 3rd Plenary Session," State Council Information Office website, December 6, 2013).

Government gives its backing

Land circulation arrangements began as a spontaneous act of farmers, but the government gradually has come to ratify and even encourage them.

Specifically, the Law of the People's Republic of China on Land Contract in Rural Areas, enforced in 2003, provides the following legal grounds for the circulation of contractual management rights.

Article 32: The right to land contractual management obtained through household contracts may, according to law, be circulated by subcontracting, leasing, exchanging, transferring, or other means.

Article 33: The right to land contractual management shall be circulated in adherence to the following principles:
(1) that consultation shall be on an equal footing, voluntary, and with compensation, and no organization or individual may compel the contractor to circulate his right to land contractual management or prevent him from doing so;
(2) that no change shall be made in the nature of the land ownership or the purpose of use of the land designed for agriculture;
(3) that the term of the circulation may not exceed the remaining period of the term of contract;
(4) that the transferee shall have the capability for agricultural operation; and
(5) that, under equal conditions, members of the collective economic organization concerned shall enjoy priority.

A "resolution on a few important issues for promoting reforms and development of agricultural communities" was adopted formally at the Third Plenary Session of the 17th Central Committee of the Communist Party of China in October 2008. The resolution states that "a market for the circulation of the rights to land contractual management will be developed. Circulation of such rights by farmers in forms including subcontracting, leasing, exchanging, transferring by sale, and forming joint-stock cooperatives based on the principles of compliance, free will, and fair payment will be permitted for developing appropriate, large-scale farming of various forms." A "resolution on a few important issues for promoting full-scale reform" adopted at the Third Plenary Session of the 18th Central Committee in November 2013 reiterated this policy.

The Central Conference on Rural Work in December 2013 adopted a policy of "promoting collective ownership, stabilizing farmer contracting rights, and revitalizing land management rights." In place of the "separation of two rights" (ownership rights and contractual management rights), China has presented the concept of the "separation of three rights" (ownership rights, contractual rights, and management rights). The policy made it clear that the government would be encouraging the circulation of management rights, rather than contractual rights.

Land circulation trusts in the spotlight

The government's backing has helped speed up land circulation. Trust companies, which specialize in trust business, have begun exploring opportunities to join as intermediaries.

CITIC Trust Co., Ltd. was the first trust company to break into the market for land trusts. On October 10, 2013, CITIC Trust, in cooperation with the government of Yongqiao district, Suzhou, Anhui province, launched "CITIC Rural Land Contracting Management Right Collective Trust Plan No. 1301." Under this plan, farmers entrusted land to CITIC Trust for a period of 12 years, the length of time left for the farmers' contractual management rights. In the first phase, 5,400 mu (1 mu = 1/15 hectares) were circulated, but the area will grow ultimately to 25,000 mu. A modern agricultural recycling economic pilot zone is to be built on the site. Land development and adjustment and recruitment of tenants will be entrusted to Anhui Diyuan Modern Farming Investment Ltd. As income, farmers will receive rent for the land. On top of that, 70% of net profits will be distributed to individual farmers in proportion to the area of land which they put in. The remaining profit will go to CITIC Trust, Anhui Diyuan, and other stakeholders. Aside from property income, farmers will be able to earn wage income by working as employees.

Land circulation trusts have the following advantages over existing arrangements such as land exchanges, leases, and land joint-stock cooperatives.

First, by consolidating scattered plots, including those deserted by the farmers who had worked them, and by introducing modern management, land circulation trusts make it possible to achieve economies of scale, mechanize farming, and develop markets.

Also, making use of trust schemes allows for a clear distinction between land contracting rights and management rights. Leaving management and control of the land to a business specializing in those functions can raise production efficiency and increase farmer incomes. Moreover, even if the business that gains the management rights fails, it does not adversely affect farmers' contracting rights.

Furthermore, farmers can earn income from the land as an asset, even if they are not involved directly in farming. This increases their freedom to move into industrial or service jobs. These advantages will help to correct the income inequality between urban and rural areas.

Finally, with their specialty in fund procurement, trust companies can support the modernization of agricultural from the financial side.

Remaining issues

It is fair to say that land circulation has come a long way in China, but there are many problems that remain unresolved.

First, land circulation is inconsistent with current laws in some ways, and relevant laws do not provide enough guarantees (see Liu Weibo, Liu Qin, and Li Zhong, "Analysis Concerning a New Model for Agricultural Land Circulation in China," The World of Survey and Research, No. 4, 2012).

The first specific example is that farmers are not allowed to own farm land. Article 2 of the Land Management Law of the People's Republic of China stipulates that "The People's Republic of China resorts to a socialist public ownership, i.e., an ownership by the whole people and ownerships by collectives, of land." In other words, all land belongs to the state or farmers' collectives. Ownership of agricultural land cannot be sold or illegally transferred. Under the law, land circulation does not apply to ownership, but only to contractual management rights, which are in effect the right to use the land.

The conversion of agricultural land to other uses through circulation is also restricted by Articles 4 ("The State is to place a strict control on the usages of land") and 63 ("The land use right of peasant collectives shall not be leased, transferred, or rented for non-agricultural use"). However, land is in fact converted to other uses quite often.

Besides, Article 33 of the above-mentioned Law of the People's Republic of China on Land Contract in Rural Areas limits the period during which land is under circulation. In reality, though, the circulation period shown in most land circulation agreements is longer than the remaining contracting time and thus is inconsistent with the law.

Second, farmers' interests during the land circulation process are not adequately guaranteed. Rent and other income which farmers receive from land circulation are not high, reflecting the fact that agricultural land is not very productive. Moreover, if the circulated land is converted to other use, it may harm farmers' livelihoods in the future. It often happens, actually, that after obtaining management rights, enterprises do things such as putting up buildings without permission that degrade the land. In those cases, after the agreement ends, farmers can no longer use the land for farm production as before.

Third, the market infrastructure for land circulation is not fully mature. For one thing, it may be impossible to form an effective agreement because it is unclear to whom the rights to land contractual management belong. The government is making progress in clearing this up, but it will take some time to complete. Also, there are even cases where the agreement content has not been formalized, thus there is only a verbal promise between the parties. This makes it difficult to resolve disputes through legal procedures. Moreover, no specialized intermediation organizations have been developed, a fact that hinders large-scale land circulation.

Finally, financial support for agriculture is inadequate. In contrast to urban areas which have surplus capital, rural areas lack capital. Most farms are so small that it is very difficult for them to obtain financing from banks. Transitioning from traditional to modern agriculture means changing from labor-intensive agriculture to capital-intensive and technology-intensive agriculture. Circulation and consolidation of agricultural land, as well as large-scale farming, are prerequisites to modern agriculture, and they require large amounts of funding. Therefore, bank lending to agriculture and investment from urban areas into rural areas should be encouraged.

Resolving these problems is the prerequisite for the full-fledged circulation of agricultural land. To pave the way for this, China needs to improve the relevant laws and make greater use of the trust system.

The original text in Japanese was posted on March 7, 2014.

Box: "Nanhai Model" based on land joint-stock cooperatives

Many land joint-stock cooperatives were formed in the 1990s in the Nanhai district of Foshan, Guangdong province. The purpose of the cooperatives was to meet the demand for buildable land needed to industrialize the area while increasing income to farmers. This arrangement, which came to be known as the Nanhai Model, consists of two parts. The first part is the reorganization of land in the jurisdiction into commercial/residential zones, economic development zones, and basic agricultural land protection zones. Farm land is maintained at or above a certain level in area and is used more efficiently. The second part is the allocation of shares to members of the land joint-stock cooperative and the proportional payment of dividends, based on the principle that "everyone participates and everyone receives dividends."

At first there was an emphasis on the principle of equality as far as profit distribution was concerned, so the following rules were widely adopted. Age became an important standard for determining the number of shares, and thus the amount of dividends, allocated to each member of the land joint-stock cooperative. Generally, the older the member is, the greater is the benefit. Moreover, the number of shares allotted to each member is adjusted regularly to reflect not only changes in member age but also population changes like births, marriages, and deaths. Shares allocated to members cannot be inherited, donated, or transferred. However, as conflicts of interest between new and existing members became more prominent, some areas began to adopt new schemes whereby the numbers of shares, once fixed, would no longer be adjusted as population and member age change, while the inheritance, donation, and transfer of shares have come to be allowed.

Related articles

March 7, 2014